LGE: No fear of deflation with 4.7% growth last year

PETALING JAYA: The strong economic growth of 4.7% last year and a 0.7% drop in the January 2019 Consumer Price Index (CPI) by 0.7% – the lowest in nearly 10 years – have dispelled any fear of deflation, says Lim Guan Eng.

The Finance Minister said the CPI decline proved that the government's policy of abolishing the Goods and Services Tax (GST) and replacing it with the Sales and Service Tax (SST), as well stabilising fuel prices with a ceiling price mechanism, was working.

He said the measures expanded the economic pie to benefit both businesses and the rakyat.

"The fall in prices is due to cheaper input prices. 

"The price of RON95 petrol for instance was approximately 13% cheaper in January 2019 compared to a year ago, and this has positively affected the prices of goods and services that are free from GST.

"The fuel price stabilisation policy, in particular, passes the savings from cheaper fuel prices directly to consumers immediately while the ceiling price mechanism protects them from high and soaring petrol prices," he said in a statement on Sunday (Feb 24).

The price decline should improve the purchasing power of Malaysian consumers and add to economic growth, he added.

"The low inflationary environment has encouraged private consumption to grow at a fast pace of 9.0% and 8.5% year-on-year in the third and the fourth quarter of last year respectively.

"The economy is going strong and the government projects the 2019 GDP (gross domestic product) to expand a further 4.9% after expanding 4.7% last year. 

"Certainty, clarity and consistency in government policy have engendered growing confidence in the business community, capital markets and investors," said Lim.

He added that the fourth quarter GDP growth of 4.7% year-on-year was higher than the market consensus of 4.5% year-on-year as compiled by Bloomberg.

"Malaysia's faster-than-consensus growth and faster-than-average growth of A-/A3-rated economies have convinced credit rating agencies to maintain Malaysia's high sovereign credit ratings of either A- or A3.

"Fitch Ratings on Thursday, is the latest credit rating agency to reaffirm Malaysia's A-rating with a stable outlook based not only on the country's healthy GDP growth, but also to progress on fiscal reforms to increase transparency and curb corruption, fiscal consolidation to reduce the fiscal deficit, and due to Malaysia registering a positive 2018 current account balance of 2.3% to GDP," he said.

The January 2019 CPI decline did not arise from any weakening of demand or economic growth, said Lim.

"Instead, the price decline was largely caused by supply factors in the form of cheaper input cost, specifically cheaper fuel prices. 

"This can be seen clearly from the public data published by the Department of Statistics Malaysia (DOSM). The CPI data can be obtained from DOSM by the public for free.

"This makes the January 2019 price decline very different from the deflation Malaysia last experienced in 2009.

"During the global financial crisis, Malaysia suffered a recession with the GDP contracting by 5.8% in the first quarter, falling 3.7% in the second quarter and finally decreasing 1.1% in the third quarter of 2009," he said.

A Nielsen survey also showed Malaysia's consumer confidence stood at 118 points in the fourth quarter of 2018, 24 points higher from a year ago.

"The jump is the highest among all countries surveyed and it places Malaysian consumers as the 7th most confident among 64 economies.

"Additionally, approved manufacturing foreign direct investment (FDI) for the first nine months of 2018 rose to RM48.8bil, or 249% higher than the same period in 2017.

"These approved investments are expected to create an additional 41,000 quality manufacturing jobs in the next two to three years that can help improve local wages.

"Despite the 0.7% drop in the CPI, the government understands there is much to be done in bringing the living costs of ordinary Malaysians to a more manageable level, especially for those belonging to the B40 group," Lim said.

The government is working to ensure that the benefits from the reduction in CPI can be channelled downwards to a wider segment of Malaysians, he added.